It doesn’t matter if this is a false rally

The Wall Street Journal Opinion page has an interesting article. The author, Rich Karlgaard of Forbes magazine, claims that our current rally of stocks is not a true rally. He does this by comparing the growth of various stock market "rallies" with the growth in price in high-value commodities. For instance:

  • The current rally has the S&P 500 up 124% over the past four years but gold is up 88%, oil 106% and silver 167%.
  • In the 1974-1980 rally, the S&P 500 was a gain of 103%. But over those six years gold rose in value by 182%, oil by 270% and silver by 340%.
  • August 1982 to January 2000 boom, during which the S&P 500 soared 1,194% while gold dropped in value by 35%, oil by 23%, and silver by 17%. Stocks way up. Commodities down.

Mr. Karlgaard's opinion is the boom of 1982-2000 was a true stock rally while the others were simply a market reaction to the politics and economics of the time. He opines that since commodities went up then the stock market had to go up. All of the investment categories rose together so therefore it wasn't a true rally.

I will make a couple of points.

  • A couple of data points do not make a trend.
  • Investopedia and Wikipedia don't define a rally as only being a rally when it is exclusive.
  • It probably doesn't matter. While I don't comment on commodities trading on this site, I understand why some investors choose those markets and I wish them well. The performance of the commodities markets really doesn't matter to me except as they effect the performance of my stock holdings due to the cost of raw goods.
  • Regardless of the reason why a market becomes a bull market, it is the responsibility of investors to take advantage of the rally and maximize the return.

The system that I propose in my book, The Confident Investor, does great in a rally. Interestingly, the system has a higher increase in return in bad market times but that is simply because the standard of success (Buy-and-Hold) is so low during bad market times. To use a sports metaphor, it is easy to look like Michael Jordan on an 8 foot rim! Although perhaps I shouldn't sell myself short - during a rally it is easy to make money (a blind squirrel can find nuts and get fat in a cashew factory) but making money in a turbulent market as I show in The Confident Investor is a real feat.

 

 

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